Lawmakers Eyeing Prepaid-Tuition Plans Anew

When her husband died suddenly five years ago, Sally Gilliland, a
Bradenton, Fla., mother of two, says she spent no time worrying about
covering her college-bound sons' education on a nurse's salary.

That's because, in 1988, the Gillilands were among the first
families to enroll in Florida's Prepaid College Program, a "pay now,
learn later" approach to college financing that allows parents to lock
in their children's future college-tuition bills at current prices by
paying into a state-run investment program. State financiers invest the
early tuition payments, and proceeds from those investments cover
subsequent tuition increases at state colleges and universities.

Ms. Gilliland says her family's purchase of college "contracts"
through the Florida program covered most education expenses for her
sons, Pat, now 20, and Sean, 22, who today attend the University of
Florida in Gainesville.

"I had peace of mind knowing that college was paid for, no matter
what," she said in an interview last week. "Tuition--well,
everything--had increased, and it would have been hard to afford two
college educations as a single parent. The program saved me a lot of
sleepless nights."

Critics have charged that prepaid-tuition programs often fail to
benefit students who need the most financial help. Nevertheless, in
answer to public anxiety over the soaring costs of higher education,
lawmakers across the country have adopted or are weighing tax-exempt
tuition-savings programs like Florida's, allowing parents to start
paying their children's tuition bills before the youngsters are
reading, writing, or even talking.

Such plans got their start in the late 1980s. Fourteen states have
prepaid-tuition programs in place, and a host of others, including
California, Illinois, New York and Connecticut, are now weighing plans
of their own. Most programs allow the benefits to be transferred to
nonparticipating institutions in or out of state.

The Way of the Future

More than 500,000 students are now enrolled in prepaid-college
programs, and experts expect that, before long, every state will offer
a version.

"The handwriting is on the wall," said Brian Fitzgerald, the staff
director of the Advisory Committee on Student Financial Assistance, a
Washington-based organization that advises Congress on higher education
funding trends. "There's a tremendous hysteria over colleges' rising
costs, and [these programs] are one way a state can respond."

Although more young people than ever are attending college, state
funding for higher education has not risen with demand. According to
Mr. Fitzgerald, the ever-increasing costs of Medicaid and prisons have
put tremendous pressure on state budgets, and, as a result, funding for
public colleges has been shrinking.

Schools have recouped some of their losses by increasing tuition.
For the past 15 years, the tuition at public colleges--where more than
two-thirds of all college students are enrolled--has risen nearly three
times as fast as household incomes, according to a U.S. General
Accounting Office report released last fall.

According to the U.S. Department of Education, the average college
costs for the 1995-1996 school year--including tuition, fees, room, and
board--were $7,013 for public colleges and $17,613 for private
colleges.

Meanwhile, student financial-aid--federal, state and institutional
grants and scholarships--have ebbed, forcing more students to take out
loans to pay for school.

Not Just a Luxury

Michigan created the first state tuition-prepayment program in 1986,
and before long a half-dozen states had created or were considering
similar plans.

Nationwide legislative efforts stalled, however, while a Michigan
case that centered on whether and how such prepayment programs would be
taxed moved through the courts.

Michigan sued the Internal Revenue Service for tax-exempt status for
its plan in 1994, arguing that its prepaid-tuition program, the
Michigan Education Trust, was "an integral part of the state," and that
traditionally the federal government has not taxed the direct income of
states. In November 1994, a federal appeals court ruled in Michigan's
favor on the tax issue. States have been creating similar programs at a
fast pace since.

With $1.6 billion in assets, Florida runs the largest program in the
nation. Last year, the Sunshine State sold 40,000 tuition contracts and
10,000 dormitory contracts (covering on-campus room and board), for a
total of 426,000 contracts since the program began.

"A college education does not have to be a luxury," program Chairman
Stanley G. Tate writes in a 1997 annual report. "The legislature
created the program to support its policy of providing affordable
post-secondary access to as many Floridians as possible."

Supporters of Florida's program say the plan renewed enthusiasm for
college.

"Knowing that college awaits them I think helps motivate parents and
kids to work hard and focus on school," Ms. Gilliland, the Bradenton
mother, said.

But prepaid-tuition programs are not without detractors.

A 1995 GAO study of such programs examined several well-known
concerns, including fears that the plans subsidize the education of
mostly well-off students while doing little to help families with the
greatest need.

But supporters say that not all government programs have to help the
poor and that increased saving by middle-class families means more
financial aid will be available for lower-income students.

Moreover, the GAO study showed that several states have programs
flexible enough to encourage even families with little or no disposable
income to invest. Florida, for example, offers a long-term community
college contract for as little as $11 a month.

Michael A. Olivas, a law professor at the University of Houston and
an expert on prepaid-tuition programs, said that the best of these
programs--the most flexible and expertly administered--"can service and
create a public good."

"Anything that gets families to focus on college is a good thing,"
he said.